With Microsoft Appointment, Don’t Count On A Transaction With Yahoo! In The Near Term

Background: Microsoft announced that they have appointed former Yahoo! executive Dr. Qi Lu to head up the Online Services Group and report to CEO Steve Ballmer. Dr. Lu served at Yahoo! for 10 years, where he was recently executive vice president of Engineering for search and advertising. Yusuf Mehdi, the most popular face associated with Microsoft’s efforts to combat Google, will serve as head of the Online Services business (announced a few weeks ago) and will report to Dr. Lu. Brian McAndrews, former CEO of aQuantive, and the one speculated to head the group, will exit the company, presumably because he was passed over for the position. He remains as a consultant to Ballmer.

What This Really Means
My sources close to the situation have told me that after the failed acquisition of Yahoo!, Microsoft is “seriously” pursuing a strategy to grow organically, both the display and online search businesses, with particular emphasis on online search. They have code named their strategy Project Granola, which has already been quoted in the press.

With the hire of a key veteran of Yahoo!’s search business and someone with a keen knowledge of how Yahoo! revamped search through Panama, Microsoft is hoping to use Dr. Lu’s knowledge to now revamp their own search business. So expect announcements out of Microsoft on this in the future. They believe that time is on their side, given the current environment. I do not necessarily disagree with that assumption.

Microsoft has essentially moved on for now and is not interested in any transaction with Yahoo!, whether it be a full acquisition or a purchase of the search business. Pundits interpreting the hiring of Dr. Lu as a sign of a pending cooperation with Yahoo!, are misguided. All of the attention in the press about a transaction for the search business is pure noise for now. I believe so even though Ballmer said he remains interested in some form of a transaction and that some have indicated that Dr. Lu pushed for a transaction with Microsoft when he was at Yahoo!. Thus, investors buying Yahoo! solely for hopes of a transaction could be holding on to dead money for sometime. [Admittedly, the stock could rise due to the company’s own performance.]

Will Microsoft succeed is catching up to Google? I wouldn’t bet on it but I wouldn’t bet against it either. I am taking a neutral view. Yahoo! did narrow the monetization gap with Google with their revamped search engine, so the assumption can be made that with Dr. Lu, Microsoft can do the same. But the problem for both Yahoo! and Microsoft is “Volume”. Google has it and they do not. So my longer-term bet is that some form of cooperation is in the cards for Yahoo! and Microsoft. But near-term don’t expect anything but pure noise out of all.
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